MGT 100 Chapter Exam

Inventory Management II

GENERAL INSTRUCTIONS. Show all your solutions and write all relevant equations/formulas. Write clearly and as legibly
as possible. Avoid unnecessary erasures. Follow specific instructions for each problem. A maximum of three (3) points
only will be deducted for not following general or specific instruction/s.

PROBLEM 1 Here are data for disposable water-testing kits stocked by a field unit of the Environ- mental Protection
Agency (optimal N„ — 6 orders/year): Average daily use 5 kits Average reorder period 20 days Cost to
store one kit per year $8 Estimated out-of-stock cost per kit $30
Usage during Probability of this usage
reorder period
40 .05
60 .15
80 .20
100 .30
120 .20
140 .08
160 .02
What should the field unit's reorder point be for this SKU?

PROBLEM 2. Dave Williams is a management consultant with Systems Enterprise. He has been asked to make
recommendations to the city of Marshall regarding the seating capacity of a new athletic stadium which
the city is planning to construct. Dave has estimated that atten- dance at the stadium will be normally
distributed with a mean of 6,000 persons. He feels that for about 75 percent of the athletic events,
attendance will not exceed 8,000 fans. The city officials would like to accommodate ticket sales at a 95
percent service level. What seat- ing capacity should Dave recommend for the new stadium?

PROBLEM 3. The Village of Oswego experiences very severe snowstorms during the winter months. In order to keep
the roads clear, the maintenance personnel use rock salt. Based upon past experience, the mean winter
consumption of rock salt has been found to be 150 tons, and in about 70 percent of the past winter
seasons, 200 tons or less have been used. The annual snowfall and consumption of rock salt are nearly
normally distributed. Village officials must budget for next year's planned usage of the salt. They know
that if sufficient rock salt is not on hand to ensure a 95 percent service level, the good citizens of
Oswego will be very irate indeed. How much rock salt should they have on hand for the coming winter?
If it costs the village $15 per ton to store unused rock salt through to the next winter, how much should
the officials expect to budget for storing their safety stock of rock salt?

PROBLEM 4. Computers-For-Fun stocks a very popular computer game called Wonderland. Recendy, some of the
customers have complained about excessive stockouts at Computers-ForFun, and Wendy Mills, the
store's manager, is considering an increase in safety stock for the games. Wendy has estimated that the
demand in the reorder lead time for Wonderland games is normally distributed with a mean of 50
games and a standard deviation of 25 games. She currendy places orders for new games, which cost her
$10 each, when the stock level drops to 80 games. If holding costs for Wendy are 22 percent, how much
will her costs increase if she adopts a service-level policy of 99 percent during the reorder lead time?

PROBLEM 5. Northside General Hospital has instituted an inventory control program for its pharmacy and dispensary;
this step has led to a considerable dollar savings in inventory costs. Since a computer was installed, over
90 percent of the hospital's SKUs have been ordered under an EOQ system. The director of supply has
computed the cost of carrying inventory at 16 percent per year and the cost of placing an order at $40.
The hospital's supplier of surgical thread, which is now one of the optimally ordered SKUs, has just
offered a 3 per- cent discount from list price if the hospital will buy its annual requirement of this item
($9,000) at three equally spaced intervals. Should this offer be accepted?